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Einhorn’s proposal is to create a new class of preferred stock that would be distributed to existing shareholders, paying a 4% dividend indefinitely. Einhorn believes this plan could unlock $150 billion in shareholder value. But let’s put on our i-Banker suits and see how the proposal would work in theory.

The value of a business is determined by the company’s future cash flows discounted by an appropriate interest rate.

Here’s how Apple is roughly valued today.

The problem with Apple Inc. (NASDAQ:AAPL), in Einhorn’s view, is that the company is sub-optimally financed by expensive equity. Investors discount future cash flows at a high rate, reducing the value of the firm.

Preferreds are advantageous because they’re cheaper to issue than equity. Preferred shareholders will accept a lower return because yields are fixed and they’re first in line to receive any dividends.

By issuing $236 billion in preferreds, Apple Inc. (NASDAQ:AAPL) can reduce its cost of capital, lower the rate cash flows are discounted, and increase the value of the firm.

Amazing! Using the super computing power of a napkin, I’ve created $150 billion. Somebody call Harry Potter, because I just found the Philospher’s stone.